Ten Things the Gaming Industry Won't Tell You

1. "You can't win..." Everyone knows the house has an advantage. But most casino patrons don't realize just how heavily the odds are stacked against them. Take keno, in which you pick a string of numbers, hoping to match them to what the casino randomly generates. The house advantage is at least 25%, increasing with the more numbers you pick, says John Alcamo, author of Casino Gambling Behind the Tables. The odds of hitting, say, the 10 spot -- a string of 10 numbers -- are nine million to one. (Getting killed by fireworks is nine times more likely.) Despite those odds, a $2 bet usually pays off at only $50,000 to $200,000.

Slot machines are popular because they offer a shot at a big jackpot for little investment. For example, $3 gets you a chance at the Megabucks jackpot, which links slot machines in Nevada and builds like a state lottery from a base of $5 million. The odds of winning? Nearly 17 million to one. You have a better chance of being killed by an asteroid striking Earth.

OK, so maybe you won't win the jackpot in slots. But surely you have a decent shot of walking out ahead of the game, right? Don't count on it. "Slot machines are the biggest moneymakers in the casino," Alcamo says. "That should tell the players something." Experts like him never play games that give the house more than a 2% advantage, and quarter slots put the advantage at about 8%.

Your best bet? Blackjack. If you play perfect strategy, the house advantage is less than 1%. And in craps, the pass- and come-line bets give the house an advantage of less than 1.5%.

2. "...and if you do, we might not pay you." While on vacation in Lake Tahoe in September 1996, Cengiz Sengel stopped to show his wife the lights of Reno, Nev. They walked into the Silver Legacy casino, got a $20 bag of quarters and headed straight to one of the slot machines. A few pulls later, three jackpot symbols popped up in the windows. The Sengels jumped up and down, hugging each other as fellow slot players rushed over to congratulate them. They had just won nearly $1.8 million. Or so they thought. A supervisor, claiming the machine had malfunctioned, denied the Sengels the payout. The couple appealed all the way to the state Supreme Court, which this June ruled against them.

Effie Freeman can sympathize. In 1995, she put $3 into a slot machine at the now -- defunct Splash Casino in Tunica, Miss., and was stunned to see red, white and blue ducks line up, signaling a $1.7 million jackpot. But the state gaming commission ruled that it didn't count because the machine had gone into "tilt" mode.

Todd Westergard, a Nevada regulator, says that such decisions, no matter how cruel they sound, are only fair. It's the computers inside the machines, not what pops up in the window, that determine winners, he says, and in the Sengels' case the computer connection was disrupted.

But gamblers don't care about the technical explanations. "The main thing is that we got those three symbols," says Cengiz Sengel. "They found a way not to pay us."

3. "We promise more than we deliver." Twenty-seven years ago only seven states had lotteries, and only Nevada allowed casinos. Now 37 states have lotteries, and 28 have casinos (including Indian gaming). Why have policy makers and the public allowed gambling to flourish? One reason is the notion that it creates jobs and commerce.

But research suggests the downside far outweighs the benefits. "The economy as a whole would be much better off had we not allowed (casino gaming) to expand," says Earl Grinols, a University of Illinois economics professor. Figuring in a broad range of factors -- crime, lost productivity, bankruptcy, social services and regulatory costs -- Grinols determined that each pathological and problem gambler costs the public $13,600 per year; the total works out to $180 per citizen. That more than negates the industry's economic benefit, which Grinols estimates at $50 to $70 per citizen.

Much of the income generated by casinos simply gets diverted from other local businesses, critics say. Atlantic City's a good example. Within four years of the casinos' arrival, a third of the city's retail businesses had closed. Meanwhile, crime soared.

What about lotteries? That money surely is a windfall for causes like public education, right? Not always. A study by St. Mary's College professors Patrick Pierce and Donald Miller found that while lotteries provide an initial boost to education budgets, the increases quickly taper off. In fact, the professors say, states with lotteries eventually provide less support for public education per capita than do states without them.

4. "We know everything about you." Casinos have developed sophisticated techniques for targeting and profiling repeat gamblers. Harrah's Entertainment (HET) has led the way, hiring marketing experts and a Harvard professor. In 1997, the company began gathering details on players when it rolled out its Total Gold frequent-gambler cards (now called Total Rewards) and has built a database of 19 million customers. Players insert the cards into slot machines or hand them to casino supervisors when they play table games. The cards are marketed as a prestige item that helps players accumulate comps such as free rooms, meals and show tickets. But the real purpose is to track the habits of each customer and tailor a marketing plan that will keep players coming.

If you're a big bettor, you'll find that casinos know all kinds of creepy information -- just enough to push your buttons. "You put your slot card in the machine and bing, it's ticking off in the office," says syndicated columnist Mark Pilarski, who spent 18 years working at casinos. "If you're a good customer, they send down a hostess, she pats you on your back and offers you dinner. She gets information on you. Next time you come in they ask about your wife or dog by name. They know your anniversary. They'll definitely send you a card for your birthday."

5. "We're a lousy investment." If you don't want to bet on their games, maybe wagering on casino stocks is a good option. Think again. Though gaming stocks are up 16% this year, most haven't provided a great return over the long haul. The sector's up only 22% over the past five years, compared with the S&P 500's 171% increase.

Some stocks have been outright busts. Harrah's is trading 47% below where it was five years ago. Mandalay Resort Group (MBG) is down 35%. And let's hope you didn't let your money ride on The Donald. Stock in Trump's gaming company, Trump Hotels & Casino Resorts (DJT) is down 78% over the past five years.

One big winner has been MGM Grand (MGM), up 36% this year. Still, analysts at Salomon Smith Barney and Lehman Brothers just downgraded their ratings on the stock from Buy to Neutral. The reason? With a recent expansion of casinos and hotel rooms, Vegas may be getting saturated. Add in competition from Indian gaming in California and the prospect of a slowing economy, and revenue could take a hit.

Gaming stocks are not for the faint of heart. Saddled with debt, many of these companies experience the kind of wild price swings that only a day trader could love. "It's a very trade-oriented sector," says Lehman Brothers analyst Stuart Linde. "It goes in a boom-or-bust cycle."

6. "Addicts keep us in business." Does the gaming industry target addicts? "It's like asking, Does the vodka industry target alcoholics?" says Henry Lesieur, head of the Institute for Problem Gambling. "Well, they target heavy drinkers, and a certain percentage are alcoholics."

Duke professors Charles Clotfelter and Phillip Cook did a study that found that 10% of lottery players account for 68% of lottery purchases. Similarly, Illinois professor Grinols estimates that one-third to one-half of casino revenue comes from problem or pathological gamblers. "After a while (some casinos) don't want compulsive gamblers because they overrun their credit," Lesieur says. "But by then they've already made a lot of money off of them."

Perhaps more disturbing are cases where casinos allow known addicts to continue betting. After losing a million dollars, Houston businessman Joe McNeely sent a letter to several Louisiana casinos asking that they not allow him to gamble. But that didn't prevent him from losing another $2 million. McNeely then sued five casinos, claiming they continued to market to him aggressively even after they were aware of his addiction. Representatives of one casino, he says, even showed up at his mother's funeral and invited him to stop by. Though the casinos pointed out that McNeely hadn't registered with the state police, which has a self-banning system in place for addicts, they settled the suit last fall for an undisclosed amount.

7. "We target your children..." More kids today gamble than are involved with drugs, smoking or drinking, according to Jeff Derevensky, a psychology professor at McGill University in Montreal. One reason: They're growing up with a message that wagering is acceptable. "Today's 10-year-old will spend their entire life in a world in which gambling is sanctioned and owned by the government," he says. To make matters worse, Derevensky has found that the addiction rate among youths is two to four times that of the population at large.

Though it's illegal to play the lottery if you're under 18, studies show that a high share of adolescents buy tickets -- 32% in Louisiana, 34% in Texas and 35% in Connecticut. How? In some states, ticket sales aren't always monitored. Twenty-nine states use automated machines in public places such as airports and stores as one way of dispensing instant-game tickets. "You'll see that (the industry is) trying to appeal to younger people," says Laura Letson, executive director of the New York Council on Problem Gambling. Last year, for example, the council flagged the New York lottery for its marketing tie-in with Warner Bros." "Wild Wild West" -- a movie rated PG-13.

It's not just lotteries that are accused of catering to kids. Pete Earley, author of "Super Casino", points to the new family-friendly atmosphere promoted in Las Vegas. (MGM Grand now has the second-largest theme park in the country.) "It's calculated," he says. "You're encouraging future generations to come there, and reinforcing that gambling is OK."

8. "...and your parents." Five years ago an elderly woman was brought by her adult children to a geriatric clinic in Omaha. Caring for their mother after she had a stroke, the children discovered that she had rung up $35,000 on credit cards at casinos in nearby Council Bluffs, Iowa. It was the first of many similar cases for Dennis McNeilly, a psychologist at that clinic.

He began studying the effects of gambling on seniors and found that casinos tailor their marketing to attract an older crowd. The Station Casino in St. Charles, Mo., for instance, has a Golden Opportunities Club for people 55-plus, in which they can earn credits toward meals and gambling chips. The casino also offers free valet parking and $1 lunches to seniors, and some of its slot machines are based on detective stories from the '40s. Some casinos run shuttle buses from retirement homes. McNeilly found one casino that featured former stars of Lawrence Welk's TV show. The industry even has a term, "third-of-the-month club," to describe gamblers whose casino trips coincide with the arrival of Social Security checks.

"The senior population is getting destroyed by gambling," says Ed Looney, executive director of the Council on Compulsive Gambling of New Jersey. He cites the fact that in 1997, gamblers 60 and older accounted for 65% of the $3.7 billion Atlantic City took in. "You have a right to market your product, but there's a line you need to draw," Looney says. He points out research that shows seniors get to the crisis stage of gambling faster, and don't have the time to rebuild their finances when they get in trouble. "There's no way they can recover," he says.

9. "We have your legislators in our pocket." At an investors' conference in June, MGM Grand Chief Financial Officer James Murren was asked about the status of the company's new temporary casino in Detroit. He acknowledged that MGM couldn't complete a permanent facility in four years, as it had promised the city. Still, he added, "There's no way in the world they're going to shut us down. We pay our gaming taxes daily."

His comments reflect just how reliant policy makers have become on casino money. And it's not just in the form of taxes. In 1998 congressional and presidential candidates received $5.7 million from the gaming industry, up from $1.1 million in 1992. Soft-money contributions jumped from $400,000 to $3.8 million.

From 1997 through 1999, the gaming industry spent $22.5 million lobbying federal lawmakers, more than such powerful contingents as alcohol and gun groups, according to political watchdog Common Cause. With that kind of spending, it would be tough to pass antigaming legislation, says William Thompson, a professor of public administration at the University of Nevada at Las Vegas. "They've got the bucks, and the opposition doesn't. The casinos make contributions to every viable candidate." Adds Robert Goodman, head of the U.S.Gambling Research Institute: "Government is moving toward relationships that are problematic."

10. "Our regulation is full of loopholes." Gaming industry officials like to say that their business is tightly regulated. But the truth is, regulators often have their hands tied. Take Indian casinos. Though they have to cooperate with the states to some extent, often tribes are left to regulate themselves. A new compact in California, for instance, leaves it unclear whether the state has the power to audit the tribes' books or inspect their slot machines.

Keeping tabs on Internet gambling is even tougher. Congress is discussing possible measures, but for now regulators can do little about the 850 foreign sites that cater to U.S. gamblers. In some countries, all that's necessary to get a license is to register. "They don't have anything like regulation," says Sue Schneider, chair of the Interactive Gaming Council.

Then there are the "cruises to nowhere," boats that depart from coastal U.S. cities and head into international water, where they offer gambling in an unregulated environment. "In a lot of cases, we aren't even sure who the entities are operating these games," says Kent Perez, Florida assistant attorney general.